Between Q4 16, and Q3 17, the S&P 600 posted an average -1.7% earnings decline, but over the next four quarters earnings are expected to grow by double digits each quarter. The big reason for the increased growth expectations is that small cap stocks are expected to benefit from the tax reform law due to their domestic orientations. The chart below shows the stark contrast from the previous earnings growth rates, and what is expected to be obtained for the current quarter and the following four quarters.

Further, quarterly earnings are expected to hit $9.34 billion in Q4 17, and rise up to $11.1 billion by Q4 18. Further, these growth rates are also not taking into account any improvements in future guidance in this upcoming earnings season (it is believed that the tax law will cause many companies to increase future earnings guidance during this quarter’s earnings season). The chart below shows the current dollar earnings growth rates, and as you can see they are significantly better than the previous four quarters.

Given these high expectations for small cap stocks, we identified the best small cap mutual funds to take advantage of this long term growth trend. First, we started with the Zacks Mutual Fund Screener, and looked for funds that had at least 60% exposure to small cap growth stocks, a low expense ratio, no load fees, 1 year total return of +20% or better, and a Zacks Rank #1 (Strong Buy), or a Rank #2 (Buy).From the results, we picked the top 3 (out of 5 that met these criteria).

The Picks

TCM Small Cap Growth Fund (TCMSX), a Zacks Rank #1 (Strong Buy), seeks long-term capital appreciation by investing at least 80% in stocks of small capitalization companies.

Current Sector Allocation:As of the last filing, the company has the most sector exposure in the following; Technology 32.35%, Industrial Cyclical 18.64%, Other 12.35%, Finance 8.8%, and Services 7.8%.  

Cost Specifics: There is a $2,500 initial investment requirement, it has a 0.8% management fee with a total expense ratio of 0.95%.